Continuing with Chairman Mary Schapiro's speech before a Security Traders Association audience and her 5 trading concerns, after the jump, we discuss #'s 4 and 5:

4.  Market Fragmentation.
5.  New Market Structure Responsibilities under the Dodd-Frank Act - OTC Derivatives Market.

    4.  Market Fragmentation.  Currently, trading volume in U.S.-listed equities is split among 11 exchanges, approximately 37 ATS's, ECN's, and more than 200 B/D's that execute orders internally. Some of these trading venues display publicly available quotations;  others do not.  Ms. Schapiro expressed concern that the market structure has become so complex that perhaps most investors may not, as a practical matter, be able to devote the resources and obtain the tools necessary to protect their interests.  Accordingly, the SEC should consider steps to enhance the ability of investors of all types and sizes to trade fairly and efficiently - e.g., through rules that would enhance transparency of trading venue practices and the practices of B/D's acting as agents for investors negotiating a fragmented market structure.

    5.  New Market Structure Responsibilities under the Dodd-Frank Act.  Broadly speaking, Title VII provides a comprehensive framework for the regulation of the OTC derivatives market - specifying jurisdiction of the CFTC and SEC over the markets in swaps and security-based swaps, respectively.  It creates new classes of market participants, and it provides for the registration and regulation of these market participants, among other things.

• Security-Based Swap Execution Facility, or SEF. This new type of market participant is defined by the Act as "a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce." Market participants generally are required to execute security-based swaps subject to mandatory clearing under Title VII, on a SEF or national securities exchange.

• SEC's Challenge.  To cultivate the emergence of a market structure for security-based swaps that reflects the virtues of the current equities market: competition, access, liquidity and transparency.  Focusing on these principles should maximize the benefits this new market structure will bring - just as it has in the equities markets.  Applying these principles to the OTC derivatives market also has the potential to create a positive feedback loop, just as changes in the equities market structure - despite the significant challenges Ms. Schapiro discussed - have, over time, increased liquidity and decreased transaction costs.

• Central Clearing.   This should significantly mitigate counterparty risks in the security-based swaps market. Fair and open access to central clearing will be a key element to the new market structure for security-based swaps.  Ms. Schapiro anticipates greater pre-trade transparency of trading interest, while at the same time encouraging greater participation by market participants willing to provide liquidity.  Any trading systems intended to qualify as SEFs should support these goals.

• Increased Transparency.   This will come from real-time reporting of all transactions.  Dodd-Frank provides that all security-based swaps - whether cleared or uncleared, executed OTC or on a SEF or exchange - must be publicly reported in real time.